F1 - M8 - Adjusting Journal Entries

Question 1

Matching Revenues and Related Expenses

Answer 1

Accrual basis, US GAAP, match revenues with expenses in the periods in which they occur, sometimes “defer” or “accrue”

• Deferred revenue – cash received before earned
• Deferred expenses – cash paid before expense is incurred, asset
• Accrued revenue – cash received after revenue has been earned
• Accrued expense – accrued liability, cash paid after expense has been incurred

Question 2

Adjusting Journal Entries - Revenue been deferred

Answer 2

Record Unearned
Dr Cash
Cr Unearned Revenue

Adjust to record unearned revenue
Dr Unearned Revenue
Cr Revenue

Question 3

Adjusting Journal Entries - Expense has been deferred

Answer 3

Expense Deferred
Dr Prepaid Expense
Cr Cash

Adjusting JE
Dr Expense
Cr Prepaid expense

Question 4

Adjusting Journal Entries - Accrued Revenues

Answer 4

Revenues have been earned prior to cash
Dr AR
Cr Revenue

Expense have been incurred
Dr Expense
Cr Accrued Liability

Question 5

Error Corrections

Answer 5

adjusting entry to ensure F/S are in accordance with accrual basis of accounting

Question 6

“Rules” for Recording Adjusting Journal Entries

Answer 6

• Recorded by “end of FY”, “before” preparation of F/S
• NEVER involve the cash account
• ALL hit ONE income statement account and ONE balance sheet account